The world population has surged 18pc since 2000. Meanwhile, except during the global financial crisis of late 2008 and early 2009, the cost of food has steadily risen. The suggestion is that, just like the market for oil and metals, food and other “soft commodities” have become locked in a “super cycle”, the implications of which are only just beginning to be understood….This trend, as with so much else these days, is being driven by the rise of India, China and the other large emerging markets. As incomes in these hugely populous countries keep rising, their new middle classes are rapidly shifting from a vegetable to an animal-based diet. Meat is an extremely crop-intensive form of protein, as any vegetarian will tell you. So this massive wealth-driven Eastern diet-switch is fuelling the demand for soft commodities.
Most mainstream economists – perhaps scared of the “dismal” label – remain sanguine about global food markets. While they recognize that oil is subject to finite supply constraints – there is only so much crude in the world – they feel that because food can be grown, there is no long-term problem.
I accept that there are vast areas of the world – Russia and Africa, for example – that could theoretically raise their agricultural output. But it is vital to understand that food production itself is also a very energy-intensive business – itself highly-reliant on oil. From the fertilizers and pesticides used to treat the earth, to the machines needed to sow, reap, process, package and distribute goods to market, crude features extremely heavily in the global food supply-chain.
As a UN report commented last week “rising oil prices could further exacerbate an already precarious situation in food markets, adding even more uncertainty to the price outlook just as plantings for crops in some of the major growing regions are about to start”.
Not only by encouraging the switch to biofuels, but also by exacerbating food production and distribution costs, high oil prices can drive up food prices too – even though only oil is non-renewable. Last week, global oil markets tightened further, with Libya’s production now down at least 1m barrels per day – around 1.3pc of global production. As a result, futures contracts scraped $120 a barrel and UK petrol prices climbed above £1.30 a litre.
In the coming months, rising oil prices will bid up food costs further. More expensive food, in turn, could spark yet more unrest in the world’s oil-producing hot-spots. What we are witnessing in global commodity markets cannot be dismissed as “speculation”. These price rises represent the reassertion, after a credit-crunch induced hiatus, of long-term “structural” trends.